Given that Europe had the worlds ugliest structural deficits in 2009, the biggest fiscal drags through 2009-12 were obviously concentrated in the euro area. The good news is that through 2012-15, the worlds largest fiscal drags will be outside the euro area. Moreover, the latest credit data from the ECB confirms that euro area fiscal drag is easing. The government credit impulse is improving, which should help to lift the euro area economy out of its endless recession.
The competitiveness of many euro area economies also looked ugly at the peak of the debt bubble. But after the last few years of austerity, that picture has changed. Most euro area economies no longer have a big competitiveness problem against their global trading partners.
In terms of banking undercapitalization the euro area may no longer be winning the ugly contest either. Britains second-largest bank, Barclays, is scrambling to boost its capital to at least 3% of assets as demanded by the UK banking regulator. This highlights that undercapitalization is not just a euro area problem. In fact, after several years of gradually raising equity, banks average tangible common equity to total assets ratios in the distressed euro area now appear healthier than the ratios in the UK or Sweden.
All of this supports our view that, given their much more attractive long-term valuations, euro area equities remain well placed to outperform other markets in relative terms.